News of a Pfizer vaccine has sent COVID-impacted names soaring. However, some areas still look very cheap, particularly in the movie theater space. National Cinemedia is a decent bet and could possibly be a multi-bagger. There’s obviously a ton of risk – this is almost a microcap stock right now – so do your own homework please!
Let’s start with what I am not doing: I’m not looking at stock charts and saying, “well in January, it was $x and now its at $y, so it has a lot of upside if it just goes back to $x”.
The problem with that is that a lot of names have issued a lot of debt and or equity. For example, American Airlines just announced it was going to issue $500MM of stock. They’ve also issued a ton of debt to pad liquidity. Based on Bloomberg, the current EV is around $39.5BN compared to $41.9BN at the end of 2019… yet the stock has been cut in half. The value is being transferred to debt holders.
In fact, following yesterday’s move, a lot of center-of-the-storm names don’t have nearly the upside I would want for the uncertainty. And this includes some movie theater chains that were too levered and entered this crisis in too fragile of a position (looking at you AMC… AMC’s 1L term loans and bonds are well below par, implying that the company will still need to restructure).
But National Cinemedia does have the upside. And I don’t think they’ll need to restructure at all.
Why National Cinemedia? Several Reasons:
- Solid balance sheet means it can wait this pandemic out
- “Asset Lite” business limits cash burn now, also means cash turns back on quickly as movies come back
- Confident that movie theaters aren’t dead and that the notion that “PVOD” or prime video on demand taking share of traditional theaters is overblown
- Movie slate was deferred in 2020, but makes 2021-2022 likely a blockbuster year
Solid Balance Sheet & Asset Lite: National Cinemedia is an advertising business. They typically run the ads that you see 30 minutes before a movie run by national accounts. They don’t actually own any theaters, so the business model is very asset lite. The downside is that if the theaters aren’t open, there aren’t going to be people paying for ads!
The other issue right now is that we are in a limbo with new movies. The studios have a huge production slate they want to release (see more later below), but they want there to be fans in the stands, if you will. In sum, the theaters can be open, but if there are no films, the theaters might as well be shut to National Cinemedia.
However, National Cinemedia has $217MM of cash on the balance sheet. At its current monthly cash burn rate of $11MM in October 2020, it can last ~1.5 more years in essentially hibernation mode. Management seems confident enough that they continue to pay a dividend of $0.28/share, or ~8.5% yield based on today’s price.
Confident in Theaters Coming Back: There seems to be this feeling that Netflix killed the theater. Wrong.
Look at box office sales over time:
You need to remember that because you may not go to the theaters, doesn’t mean others don’t. And the core group of movie theater attenders area die hard group. I hate to bring it up, but people still went back to the movies following the Aurora, Colorado movie theater mass shooting. If they still go back after that, I am confident they will go back now. There have been no COVID-19 outbreaks linked to movie theaters yet.
APAC is the leading indicator – already snapped back:
PVOD (Premium Video on Demand) is not a solution right now:
Here’s Disney on the matter:
“So we’ve got a pretty robust slate. And once again, we hope that the theaters are open. A lot of our films are films that the people who choose to go to movie theaters, the experience is very different than what they would have at home. So when you look at our box-office numbers over the last couple of years, we have — we drive a lot of people into theaters to see the Disney films. These tent-pole films become kind of part of zeitgeist of culture, whether it’s Marvel, whether it’s Black Panther that was a couple of years ago, but these are movies that people like to see in theaters and talk to their friends about. So once again, we hope the theaters stay healthy and can rebound from this COVID world we’re living in now.”
What about Mulan? That was released on PVOD? Well, it wasn’t Disney’s first choice and it largely was not a success. Disney had said in the past as well that it would not have been released this way if it weren’t for Theaters being closed:
“Well that — it has had some, but that was not the primary reason that we chose to release it this way. We chose to release it this way because the release date — as some people who were following just what was going on with theaters not opening and just shift, shift, shift, we had moved the release date several times. And we believe that, that movie — given that there’s so little new content out, that the movie was done and we wanted to get it out in the public domain. And so we chose to do it this way because we believed that it was the best way to get to the most people for them to enjoy it.”
Here is Bob Iger on whether Disney+ will be the new way to release movies. He says this because he knows that Movie Theaters still generate the bulk of a film’s profits:
“The theatrical window is working for this company. And we have no plans to adjust it for our business. Your comment about how those companies are faring on the market, I think, maybe is a reflection of how the other movie companies are positioning their films and their business. We’re not the only movie company. We had the biggest box office, but we’re not the only movie company. And I suspect that it’s not due to us or either a lack of conviction on our part or any suspicion that we might be — that we might not beat on the truth. But we’re not — it’s working for us. And we have no plans in the foreseeable future to change it and that”
Now there is news that MGM wants to sell its latest James Bond movie. Apple and Netflix reportedly offered a couple hundred million dollars and MGM wanted $600MM. The PVOD offer likely would’ve led to a big loss. It had a $300MM budget plus they had already spent tens of millions on marketing. And another problem – Daniel Craig and others own backend rights to the film based on how it does. This would’ve added to the cost of the film before MGM made any money.
I am not concerned about theaters living or dying. I think they will be around for many, many years to come.
My base case for NCMI is to generate ~$109MM of FCF before working capital changes, but if I am wrong, I still think there is a ton of upside on the stock. As shown below, my discounted EBITDA shows ~18-19% FCF yield plus they will have roughly half their market cap in cash by the time they reach these numbers (currently have about 85% of market cap in cash).
In short, I think NCMI can double from here, maybe more. There is a huge film slate just waiting to come out, so I think the vaccine news is actually game changing:
Obviously there are some risks. This company is tiny and while it may not have significant maturities until June 2023, its customers do. This can be complicated. You see, NCMI was founded as a JV between AMC, Regal, and Cinemark. They are the company’s largest customers, but also because it is a JV, they also own ~60% of the company.
AMC is the theater chain I am most concerned about filing for bankruptcy. AMC could reject its contract with NCMI in bankruptcy. However, this would be messy as it would create a giant unsecured claim and NCMI might end up with a huge chunk of AMC equity. I think AMC would avoid this situation and likely just re-instate the contract, but it is something I am monitoring. AMC doing an out of court restructuring would be the best outcome here.